Abstract

A new global financial stability framework is needed to reduce the probability and severity of a future financial crisis. The financial stability framework needs to be global in the sense of being both worldwide and comprehensive, with contributions from prudential, monetary and fiscal policies. Market discipline and microprudential regulation alone cannot achieve financial stability. Monetary and fiscal policies need to contribute by leaning against the build-up of financial imbalances and by responding to busts in a symmetric fashion. Central banks are increasingly aware of the potential for trade-offs between price stability and financial stability in the short run, recognising that these objectives are complementary in the long run. Fiscal policy must be countercyclical and maintain buffers that provide the ability to respond in times of financial system stress. Enhancements to microprudential regulations to increase the resilience of individual financial institutions must be accompanied by macroprudential policies that address the stability of the financial system over time and at each point in time. The need to break with the leverage-led growth model is highlighted.